Tuesday, June 10, 2008

Most people can’t afford to pay cash when they buy a car, so they take out an auto loan. An auto loan is a big undertaking and it pays to shop around and compare interest rates and terms. After all, you’re going to be paying this loan off and the shorter the time, the better! Long-term loans generally have lower monthly payments but you’ll be paying more interest. Longer loan periods carry higher interest rates because the collateral-the car itself-devalues every day after it’s driven off the lot.

Short-term loans will usually save you money because of their lower interest rates. You’ll have higher monthly payments with a short-term loan but you save money on the total interest paid. For instance, if you buy a used car for $6,000 and finance for 2 years at 7.5%, you’ll pay $6,479.94 total for the car. If you would borrow the same amount for 4 years, the total increases to $7,213.66--$1,213.66 in interest! As you can see, the shorter the loan the less you pay in interest.

Many people prefer to lease a car, and that is also a type of loan. By leasing, your car never has the chance to get old or out of style. The lease payments are generally lower than a loan payment but there are extra costs involved such as mileage, a large down payment a damage deposit and the first monthly payment. You will have to choose between a closed-end agreement that allows you to walk away at the end of the lease or an open-ended lease that obligates you to make up the difference in the car’s residual value and the fair market value. Leasing a car can be confusing and complicated, so before you enter into a lease be sure to thoroughly read the contract!